Partnership is a business when two or more partners invest a certain amount (Capital) for a specified period to carry out business. At the end of the period the business may generate profit or loss. This profit or loss needs to be distributed between the partners. The proportion in which the profit (or loss) would be distributed among the partners is given by the ratio of the joint product of the capital invested and the period of investment for each partner.
Different type of partners :
A partner who manages the business is known as a working partner and the one who simply invests the money is a sleeping partner.
Ratio of division of gains :
(i) When investments of all the partners are for the same time, the gain or loss is distributed among the partners in the ratio of their investments.
Suppose c and d invests Rs. x and y respectively then at the end of the year c's profit : d's profit = x : y
(ii) When investments are of different time periods, then equivalent capitals are calculated for a unit of time by taking capital x number of units of time. Suppose c invests Rs. x for r months and d invests Rs. y for s months, then
C's share of profit : D's share of profit = xr : ys
Note :
(i) If a partner retires during one year period, then in such cases, only the period for which his capital was utilised is taken into consideration.
(ii) If a partner joins during one year period, then in such case, only the period for which his capital was utilised is taken into consideration.